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How the American Rescue Plan Affects Individual Tax Plans

The American Rescue Plan (ARP) was the first COVID-19 economic relief bill passed under the Biden presidency. The ARP benefits business owners in a few different ways, but many of the bill’s provisions seek to help individuals. If your clients could use some support in the coming months, talk to them about how the ARP can help them. Not all of the ARP’s provisions will affect your client’s tax returns, but some might, and you can take this opportunity to discuss their long-term tax planning strategies.

Economic Impact Payments

The ARP provides American taxpayers with yet another round of stimulus payments. This round, which is the third since the pandemic began, provided each adult and each dependent – regardless of age – with $1,400. This means that a married couple that has two children under the age of 18, a child in college who they still claim as a dependent, and an elderly parent who they care for and who they claim as a dependent, should have received $8,400 in total (assuming their AGI was below the phase-out limits). Here is a helpful summary of all three economic impact payments over the last year:

Maximum PaymentAGI at Which Phase-Outs BeginDate When Most Payments Were Issued
ROUND 1:
Coronavirus Aid, Relief, and Economic Security Act
(CARES Act)
$1,200 per adult
$500 per child
Single: $75,000
HOH: $112,500
MFJ: $150,000
April 2020
ROUND 2:
Consolidated Appropriations Act
(CAA)
$600 per adult
$600 per child
Single: $75,000
HOH: $112,500
MFJ: $150,000

January 2021
ROUND 3:
American Rescue Plan
(ARP)
$1,400 per adult
$1,400 per dependent
Single: $75,000
HOH: $112,500
MFJ: $150,000

March 2021

None of these stimulus checks are taxable. If your clients did not receive one of the first two stimulus checks or received an incorrect amount, you can help them get those payments by claiming a Recovery Rebate Credit on their 2020 tax returns. A similar credit will be available in 2021 for the ARP’s economic impact payment.

Child Tax Credit

The ARP revised the Child Tax Credit in a few specific ways, but only for the 2021 tax year. The ARP made the following temporary changes to this credit:

  • Made the credit available for children under age 18 rather than children under age 17.
  • Increased the credit amount from $2,000 to $3,600 for children under age 6, and from $2,000 to $3,000 for all other children under age 18.
  • Made the credit fully refundable.
  • Promised taxpayers that they could have access to half of their credit in 2021. Periodic payments for the child tax credit will be delivered monthly beginning in July and ending in December 2021. They can claim the rest when they file their 2021 tax returns. Because these would be advance payments of a credit, they would not raise your client’s taxable income.
  • Extended the credit to those in Puerto Rico and other U.S. Territories.

Unemployment Compensation

Under normal circumstances, unemployment compensation is taxable. The ARP waives Federal income taxes on the first $10,200 of unemployment compensation your clients received in 2020. This includes compensation provided through Federal and state programs. As of right now, this benefit does not extend to the 2021 tax year.

If you already filed your client’s 2020 tax returns and marked their unemployment compensation as taxable, you do not necessarily need to amend their returns. The IRS will automatically adjust tax returns for unemployment compensation and refund your clients the taxes that they overpaid. However, amending your client’s tax return may be a good idea. Removing unemployment compensation from income may make your clients eligible for other deductions or credits, and the IRS will not automatically make these elections on your client’s tax returns. If your client’s income with unemployment phased them out of certain credits, consider recalculating and amending their return yourself. Not all states will allow this $10,200 exclusion.  Check on your state’s department of revenue website for their most recent standing on this exclusion.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a refundable credit available to low-income individuals with earned income. In effect, the EITC acts as a wage subsidy to the lowest-paid workers. Historically, the EITC favored workers with children, but the ARP boosted the credit for workers without dependents. In 2021 only, the EITC changed in the following ways:

  • The maximum credit for workers without children will increase from $540 to $1,500.
  • Workers can begin taking the credit at age 19 (except for certain students). In 2020, workers were only eligible at age 25.
  • The EITC has no upper age limit. In 2020, the EITC was unavailable to workers 65 and older.
  • Taxpayers can choose to calculate their credit off their 2019 incomes or their 2021 incomes.

Child and Dependent Care Credit

Like many of the other provisions of the ARP, the changes to the child and dependent care credit are valid only for the 2021 tax year. For one year only, the ARP:

Raised the limitation on dependent care expenses that are used to calculate the credit.

  • For one dependent, the expense limitation raised from $3,000 to $8,000, and for two or more dependents, the limitation raised from $6,000 to $16,000.

Raised the credit amount.

  • The credit has traditionally been 35% of qualifying expenses, but the ARP raised this number to 50%. As a result, the maximum credits for 2021 are $4,000 for one dependent and $8,000 for two or more dependents, up from $1,050 and $2,100, respectively.

Made the credit refundable.

  • The credit was nonrefundable in 2020 and will revert to being nonrefundable again in 2022.

Like in the past, the credit is phased out for high earners.

Student Loan Forgiveness

The CARES Act placed all Federal student loans in forbearance beginning in March 2020. This forbearance period has been extended a few separate times, and they are currently set to expire in September 2021. The ARP did not change this forbearance, but it did assist student loan borrowers in another way: by stating that all student loan discharges would be nontaxable through the year 2025.

Traditionally, student loan debt can be discharged without tax consequences only when borrowers follow certain government programs (like the Public Service Loan Forgiveness program) or if they become permanently disabled. Most other student loan debt discharges are taxable. But the ARP has made all student loan forgiveness – of both public and private loans – nontaxable through the end of 2025.

Tax Planning Changes

Even though most of the ARP’s changes are in effect only for the 2021 tax year, take the time to adjust your clients’ tax plans. If you use a tax planning software like Corvee, you can show your clients exactly how these changes will affect them. Our software produces an easy-to-read report that shows how much money your clients will save when they use the tax strategies that you recommend. With this information, they can make better financial decisions in 2021 and into the future. If you’d like to see how our software works, contact us today for a demo.

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